Soaring Canadian Insolvencies Cripple Local Banks

Banks in Canada are starting to feel the pain of deteriorating credit quality, just weeks after we reported that insolvency filings had skyrocketed in almost all Canadian provinces. 

Toronto-Dominion Bank and Canadian Imperial Bank of Canada both just posted ugly first quarter results that included higher provisions for loan losses as a key contributor to missing analyst expectations. TD Bank saw its provision for loan losses move to C$850 million, which was up 23% from the year prior. It also marked the highest level for such provisions in at least two years, mainly split between the bank's U.S. and Canadian retail divisions (36% each), followed by the bank's corporate division. 

Toronto-Dominion’s Chief Financial Officer Riaz Ahmed told Bloomberg that bankruptcies were part of the issue in Canada: 

“The fourth quarter and the first quarter of the year always tend to have elevated provisions because of the holiday spending season, so we tend to see that seasonality in cards and auto. In Canada, bankruptcies are up a little bit and we do see a little bit of rise in delinquency in our retail cards in the U.S. None of them would rise to the level of being of particular concern for us.”

In early January, we highlighted that bankruptcies in Canada were soaring. Bloomberg reported then that the number of consumers seeking debt relief was up 5.1% to 11,320 last November, according to the Ottawa-based Office of the Superintendent of Bankruptcy. Combining October and November's numbers, there were 22,961 consumer insolvency filings, the most since 2011.

These new numbers come on the heels of the bank of Canada raising its key lending rate five times since the middle of 2017. Like in the US, the impact of rising rates on the economy is being "monitored closely", which is a nice way to say "obsessed over by central banks in order to continue to force all asset classes to rise in price".

David Lewis, a board member at the Canadian Association of Insolvency and Restructuring Professionals, told Bloomberg: 

“We’re seeing a bump, and in some provinces that bump is significant.” 

Insolvency filings were up in every province except PEI, which was unchanged. Alberta saw insolvencies rise 16%. Filings in Ontario were estimated to have risen 1% in 2018 after declining for eight straight years. Insolvency firm Hoyes, Michalos & Associates Inc. estimates that Ontario will see a minimum of a 2% to 5% jump in insolvency filings in 2019. If rates continue to rise, they predict as much as an 8% jump.